President backed Rio spy probe

John Garnaut, Herald Correspondent in Beijing

THE Chinese President, Hu Jintao, personally endorsed the Ministry of State Security investigation into Rio Tinto that led to the detention of the Australian iron ore executive, Stern Hu, and three staff, Chinese Government sources say.

The investigation appears to be part of a big realignment of how China manages its economy, with spy and security agencies promoted to top strategy-making bodies.

The ministry and the Public Security Bureau have significant new roles - the former focusing more on international economic dealings and the latter on domestic political unrest that might flow from economic instability.

The Communist Party's nine-member standing committee, led by the President, has also taken more control over economic decisions at the expense of the State Council, led by the Premier, Wen Jiabao, Chinese economic advisers say.

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The sources, who say they are familiar with details of the Rio Tinto case that have not been made public, say the inquiry began before Rio Tinto broke off its $US19.5 billion ($25 billion) investment deal with Chinalco and joined iron ore production forces with BHP Billiton on June 5.

"This is certainly not 'revenge' for the Chinalco deal not going through," said a Chinese Government source. "It is part of a considered, all-of-government response to the general resources question that was made after considering the likely international response."

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The collapse of the Chinalco deal was immediately followed by the establishment of a high-level, all-of-government group that will assess the political and economic risks of big outbound investment deals. The outbound investment assessment group, which features vice-minister level representatives of security agencies, is yet to be given a name and no details have been made public.

"That unfortunate ending to the Chinalco-Rio deal was a kind of wake-up call for policymakers that the external environment can be much more complicated than just managing trade relations," said Huang Yiping, a professor of economics at Peking University and Citigroup's former chief Asia economist.

"The group of people who will be managing these policies will be much more diverse … there will be security people and [political] risk managers, and I think more policy uncertainties."

The Australian Government declined to comment last night on the revelation that President Hu had endorsed Mr Hu's arrest.

Australian officials in Canberra and Beijing will seek more details from Chinese authorities today about the circumstances of his arrest eight days ago. He is accused of bribery and undermining China's economic security.

The Foreign Affairs Minister, Stephen Smith, said: "China needs to think very carefully what implications, if any, this has for the international business community and the international network's view of China."

The elevation of Chinese economic policy to a top national security concern began late last year with the collapse of the Shanghai and Shenzhen sharemarkets, the weakening of the real estate market and difficulties with manufacturing exports in coastal regions. The process accelerated with the full onset of the financial crisis since September.

"It probably reflects that Chinese leaders are much more worried about the economy than everybody else," said Michael Pettis, professor of finance at Peking University's Guanghua School of Management.

The economy has stabilised with Beijing's huge fiscal and monetary stimulus policy, and many believe the economy will hit the Government's growth target in gross domestic product of 8 per cent this year.

Many economists believe a sustainable recovery requires Beijing to loosen rather than tighten controls.

The top-level support for the Rio inquiry makes it even more unlikely the Shanghai State Security Bureau will reverse its decision to detain Mr Hu and his Chinese citizen colleagues, Liu Caikui, Wang Yong and Ge Minqiang.

In Australia the Opposition said Mr Hu's detention deserved a more serious response.

"He's being taken by the Chinese secret police, and there are accusations of espionage," the foreign affairs spokeswoman, Julie Bishop, told ABC TV.

"That elevates this matter to a Beijing-to-Canberra issue."

Mr Smith rejected Opposition suggestions the case could be resolved by a phone call to Chinese leaders from him or the Prime Minister, Kevin Rudd.